CAPITALDIGEST MARKET REVIEW, 05/10/2026

STERLING SET FOR BIGGEST WEEKLY RISE IN MONTHS AGAINST EURO

Sterling was on track for its biggest weekly rise against the euro in months, as mounting concerns over the fiscal outlook of some of ​the euro area’s most indebted countries dented confidence in the single ‌currency. However, the pound was set for its third straight weekly drop against the dollar, which strengthened after the mid-September Federal Reserve’s hawkish shift. Any move towards rejoining the European Union will be ​under the spotlight after Prime Minister Andy Burnham, who campaigned to stay ​in the EU in a 2016 referendum, argued the nation should ⁠again consider options, including rejoining the bloc. Markets would likely welcome such a move, ​having viewed Brexit as a long-term headwind for sterling since the 2016 referendum. Ahead of ​a UK-EU summit expected around November 20, investors will be watching for signs that prospects of closer ties lend support to the British currency. The single currency was up 0.05% at ​85.23 pence on Friday, and was set for a 0.87% weekly fall, the ​steepest since May. Reports suggesting progress towards a broader UK-EU reset may be modestly supportive for ‌Sterling ⁠sentiment,” Evelyne Gomez-Liechti, multi-asset strategist at Mizuho, said. The pound rose 0.09% to $1.3204 on the day, after hitting $1.3181 on Thursday, its lowest level since June 25. The euro/dollar rose on Friday as oil prices dropped but was on track for a weekly fall ​as the energy ​shock and France’s ⁠debt concerns weighed on sentiment. “We don’t expect this to provide any lasting support for the pound, however, as another referendum ​is both fanciful and, in our view, highly unlikely to ​see the ⁠light of day,” Matthew Ryan, head of market strategy at global financial services firm Ebury, said, referring to the EU-UK relationship. The rate outlook is also under the ⁠spotlight after ​the Federal Reserve’s hawkish shift in mid-September. Traders are ​pricing in around 30 basis points of monetary tightening from the BoE by year-end and about ​90 bps by the end of 2027.

DOLLAR SET FOR FOURTH WEEKLY GAIN VERSUS EURO 

The dollar was on track for a fourth straight weekly gain against ​the euro on Friday, supported by elevated US Treasury yields amid a selloff in European government bond markets and expectations the ‌Federal Reserve will maintain its hawkish interest rate stance. The greenback trimmed some of its recent gains after data showed US job growth in September fell short of economists’ expectations and the unemployment rate edged up to 4.2%. Benchmark 10-year Treasury yields also slipped after the report before rising 5.14 basis points to 5.285%. Still, the dollar remained underpinned by US yields that are ​hovering near multi-decade highs, rising concerns over the fiscal outlook in parts of Europe, and higher oil prices. The increase in crude prices has ​prompted some investors to reduce exposure to currencies of major energy importers, including the euro and the yen. The euro is ⁠on track for its fourth straight week of losses against the dollar, the longest such stretch since mid-May 2025. It was last up 0.13% at $1.12580. “When ​I look at the (jobs) data in aggregate, I think about it as actually a Goldilocks set of numbers: so activity is still pretty resilient but it’s ​not generating significant inflationary pressure,” said Dominic Bunning, head of G10 FX strategy at Nomura. “That’s a good backdrop from a broad economic perspective. It should be a relatively good number for risk assets in general and for high beta currencies. It also probably at the margin doesn’t have a huge impact on Fed pricing, but it removes a ​little bit of tail risk as to whether they would hike again in October.” The US central bank raised rates and signaled more hikes after the end ​of its policy meeting last month, with Fed Chair Kevin Warsh reaffirming monetary policy independence despite repeated calls from US President Donald Trump for lower borrowing costs. Markets responded by raising their bets on ‌further tightening. Traders ⁠are pricing in an 86% chance that the Fed will hold rates steady later this month, compared with 36% a week earlier, according to CME Group’s FedWatch tool. The dollar weakened 0.30% to 0.8285 against the Swiss franc . It was also down 0.15% to 157.81 against the Japanese yen , but on track for its third straight weekly increase. The dollar index , which measures the greenback against a basket of currencies including the yen and the euro, was down 0.1% to 101.88. It is set for ​its third straight weekly gain.

POUND FALLS TO THREE-MONTH LOWS AS INVESTORS FRET OVER RATES, OIL

The pound fell on Thursday to its lowest in three months against the dollar, as another wave of worry about high rates, oil prices ​and persistent inflation rattled European markets. Sterling fell by as much as ‌0.5% on the day to a low of $1.3193, breaking the $1.32 mark for the first time since late June. It was last down 0.3% at $1.3225. Investors are fretting about the long-term impact of ​oil above $100 a barrel from a protracted Middle East war, along with ​the higher borrowing costs and inflation that might follow.Markets of those ⁠countries more exposed to imported energy, whose finances are already under strain, were ​hit hard. The FTSE 100  fell as much as 2% before unwinding some ​of those losses, as British 30-year gilt yields topped 6% for the first time since early 1998, with just four weeks to go until the Autumn Budget. “Prime Minister Andy Burnham and Chancellor ​John Healey already have enough on their plate without a rapid increase in ​government borrowing costs since they took office. Gilt yields moving at such a pace presents ‌a major ⁠challenge for their spending and borrowing plans,” AJ Bell investment director Russ Mould said. In his maiden speech as prime minister at his Labour Party’s annual conference earlier this week, Burnham said he would make changes to pensions to fund universal ​social care, something that ​could add to ⁠Britain’s already strained finances. He also said he would welcome debate on the UK moving closer to Europe again, something that ​many said they see as a potential step towards rejoining ​the European ⁠Union. “Any move by the UK to rejoin the EU would likely be seen as a positive by the foreign exchange market, having witnessed sterling’s crash following the Brexit ⁠vote in ​2016. Obviously, we are years away from any ​clarity here, but let’s see whether sterling catches a bid into a supposed UK-EU summit due around ​20 November,” ING strategist Chris Turner said. Sterling at strongest in over a month versus euro after GDP revision reinforces BoE hike bets. Sterling hit ​a 6-week high versus the euro on Wednesday after data showed the UK economy grew faster than ‌previously expected in the second quarter, cementing expectations for an interest rate hike by the Bank of England by the end of this year. The pound edged up 0.4% to a one-week high of $1.3292, recovering from a three-month low it hit in the previous session. ​Against the euro it was at its highest since mid-August, with the euro down nearly 0.3% at ​85.43 pence. Economic output expanded by 0.5% in the April-to-June period, a touch higher than ⁠the initial estimate of 0.4%. Economists polled by Reuters anticipated no change from the previous estimate. Traders are pricing in ​around 33 basis points of monetary tightening from the BoE by year-end and more than 100 basis points by ​the end of 2027, LSEG-compiled data showed, although analysts broadly expect much more limited action. “You can see here very clearly a market that is overly hawkish. If we get a resolution by (November), the BoE may decide to stay on hold, but if it doesn’t ​happen, then they’ll be pushed to hike because the ECB has hiked, the Fed has hiked, the BOJ ​has hiked and they may feel a bit of pressure to do it,” said Nicolas Trindade, a senior fixed income portfolio manager ‌at ⁠BNP Paribas Asset Management. Also helping the pound gain on the dollar were comments from prominent US Federal Reserve policymaker John Williams, who said there was “no need for urgency” in raising rates. This prompted markets to lean in favour of a rate hike in December over October, the CME Group’s FedWatch Tool showed. Dollar strength has weighed on the pound this ​month and wiped out ​gains for the quarter. Sterling ⁠is set for its biggest monthly loss in nearly a year and is set for a flat end to the third quarter. However, against the euro it was set ​for small gains on both the monthly and quarterly basis, primarily driven by euro ​weakness as investors ⁠priced in relatively dovish European Central Bank policy versus the BoE. The former is expected to hike rates by roughly 90 bps by year-end, LSEG data showed. UK markets are also heading towards a pivotal month where Prime Minister Andy Burnham’s ⁠new ​government will unveil a budget. On Tuesday, Burnham said the country should consider options ​for its future relationship with the European Union, including ultimately rejoining the bloc. Britain is still grappling with the economic and political consequences of ​the vote to leave the EU a decade ago.

US DOLLAR FLAT AGAINST PEERS AFTER SOFTER-THAN-EXPECTED INFLATION DATA

The dollar was ​flat against major currencies on Wednesday following a smaller-than-expected increase in US inflation, which reduced market bets on an ‌interest rate hike from the Federal Reserve. The dollar has been strengthening in tandem with rising US Treasury yields on growing expectations of more Fed rate hikes amid inflation driven by higher oil prices. The greenback is still on track for monthly gains against the euro, Swiss franc and the pound sterling. But the ​dollar pared some of those gains following the data before recovering as US Treasury yields fell initially across the board. ​The 2-year note yield, which typically moves in step with Fed interest rate expectations, was last down 0.4 ⁠basis points at 4.885%. The euro was flat at $1.133050. The single currency is still headed for a monthly loss against the dollar after ​two consecutive months of gains. “We can’t tell if the revised PCE data by itself or if other factors were responsible for a softer-than-expected ​print, which initially caused bonds to rally and yields to come down and the dollar to weaken,” said John Velis, FX and macro strategist at BNY. “We had some strong GDP data: the long end of the yield curve has kind of gone back up and front end is still lower so the ​curve is steeper. So the 2-year yield has come down to reflect lower expectations of an October rate hike and the dollar ​has come down in tandem.” US Commerce Department data showed that the Personal Consumption Expenditures Price Index, the Fed’s preferred inflation gauge, rose 0.3% last month. Economists ‌polled by ⁠Reuters had forecast an increase of 0.4%. Traders are now pricing a 37% probability of a Fed rate hike in October, down from 70% a week ago, according to the CME’s FedWatch tool. “Today’s softer PCE report, following (Federal Reserve Bank of New York President John) Williams’ pushbackagainst the urgency of another hike, has prompted a meaningful reduction in expectations for consecutive Fed rate increases,” said Joel Kruger, markets strategist at LMAX ​Group. “That repricing is pulling Treasury yields ​lower and narrowing the dollar’s ⁠yield advantage, giving the latest wave of dollar selling a clear fundamental catalyst.” Oil prices rose and were on track for a big monthly gain in September as US-Iran talks aimed at ending the war ​stalled. The Brent November futures contract , which expires on Wednesday, rose 0.92% to settle at $103.53 a barrel. The ​dollar was also ⁠flat at 157.34 against the yen . It was up 0.26% at 0.83575 versus the Swiss franc and on track for the second straight month of gains. Sterling strengthened 0.26% to $1.3265 but was set for a monthly loss against the dollar, ending two consecutive months of gains. The dollar index , which ⁠measures the ​greenback against a basket of currencies including the yen and the euro, was flat ​at 101.47. It is still headed for a monthly gain in September, snapping two straight months of losses. Elsewhere, the Australian dollar weakened 0.57% versus the greenback to $0.6948, and ​the kiwi weakened 0.09% versus the greenback to $0.5635.

STERLING TREADS WATER AT 3-MONTH LOW AFTER WEEKLY DROP ON DOLLAR RALLY 

The pound held steady on Friday at around its lowest in just under three months against the euro and dollar, with the US currency ​set for a second sharp weekly increase on rising energy prices ‌and rate hike bets. Sterling was little changed at $1.322, after falling to $1.32 on Thursday, its lowest since June 29. Britain’s currency was on track to fall 1.2% against the dollar in its biggest ​one-week fall since May, after declining 1% the previous week. The dollar has ​rallied this week as traders raised their bets on further rate ⁠hikes from the US Federal Reserve. Rising energy prices as conflict in the Middle ​East disrupts energy flows, as well as strong economic growth, have prompted Fed officials to ​talk up the chances of more rate increases after the central bank raised borrowing costs last Wednesday. The Bank of England held rates steady last week, in contrast with the Fed and European Central ​Bank, although it flagged the possible need for increases should the US-Israeli war on ​Iran drag on. Expectations of higher interest rates tend to push up yields on a country’s bonds, ‌making ⁠them more attractive and raising demand for the currency. The pound eased against the euro to its lowest in three months, with the euro zone’s currency reaching 86.11 pence. Francesco Pesole, currency strategist at ING, said the pound is likely to struggle in ​the coming months ​as it is ⁠doubtful the BoE will hike interest rates sharply. “It seems unlikely the BoE will match market expectations for further tightening, meaning ​some large dovish repricing should still occur at some point,” he ​said. Traders ⁠in money markets expect around 35 basis points of monetary tightening from the BoE this year and more than 100 basis points by the end of 2027, although economists ⁠broadly ​expect much more limited action. Markets also expect around ​100 basis points of further tightening by the end of next year from the ECB, which has ​already raised interest rates twice this year.